diff --git a/src/engine/engine_resource.c b/src/engine/engine_resource.c
index df94efd2..c1dd3174 100644
--- a/src/engine/engine_resource.c
+++ b/src/engine/engine_resource.c
@@ -219,7 +219,7 @@ int mju_dirnamelen(const char* path) {
   }
 
   int pos = -1;
-  for (int i = 0; path[i] && i >= 0; ++i) {
+  for (int i = 0; path[i]; ++i) {
     if (path[i] == '/' || path[i] == '\\') {
       pos = i;
     }
diff --git a/src/xml/xml.cc b/src/xml/xml.cc
index be768c20..a8f29685 100644
--- a/src/xml/xml.cc
+++ b/src/xml/xml.cc
@@ -23,6 +23,7 @@
 #include <array>
 #include <cstdio>
 #include <string>
+#include <string_view>
 #include <unordered_set>
 
 #include "tinyxml2.h"
@@ -34,6 +35,7 @@
 #include "engine/engine_resource.h"
 #include "engine/engine_vfs.h"
 #include "user/user_model.h"
+#include "user/user_util.h"
 #include "xml/xml_native_reader.h"
 #include "xml/xml_native_writer.h"
 #include "xml/xml_urdf.h"
@@ -41,7 +43,6 @@
 
 namespace {
 
-using std::string;
 using tinyxml2::XMLDocument;
 using tinyxml2::XMLElement;
 using tinyxml2::XMLNode;
@@ -97,7 +98,7 @@ class LocaleOverride {
 }  // namespace
 
 // Main writer function - calls mjXWrite
-string mjWriteXML(mjCModel* model, char* error, int error_sz) {
+std::string mjWriteXML(mjCModel* model, char* error, int error_sz) {
   LocaleOverride locale_override;
 
   // check for empty model
@@ -114,13 +115,32 @@ string mjWriteXML(mjCModel* model, char* error, int error_sz) {
 
 
 // find include elements recursively, replace them with subtree from xml file
-static void mjIncludeXML(XMLElement* elem, string dir, const mjVFS* vfs,
-                         std::unordered_set<string>& included) {
+static void mjIncludeXML(mjXReader& reader, XMLElement* elem,
+                         std::string_view dir, const mjVFS* vfs,
+                         std::unordered_set<std::string>& included) {
+  // capture directory defaults on first pass of XML tree
+  if (!strcasecmp(elem->Value(), "compiler")) {
+    auto assetdir_attr = mjXUtil::ReadAttrStr(elem, "assetdir");
+    if (assetdir_attr.has_value()) {
+      reader.SetAssetDir(assetdir_attr.value());
+    }
+
+    auto texturedir_attr = mjXUtil::ReadAttrStr(elem, "texturedir");
+    if (texturedir_attr.has_value()) {
+      reader.SetTextureDir(texturedir_attr.value());
+    }
+
+    auto meshdir_attr = mjXUtil::ReadAttrStr(elem, "meshdir");
+    if (meshdir_attr.has_value()) {
+      reader.SetMeshDir(meshdir_attr.value());
+    }
+  }
+
   //  not an include, recursively go through all children
   if (strcasecmp(elem->Value(), "include")) {
     XMLElement* child = elem->FirstChildElement();
     for (; child; child = child->NextSiblingElement()) {
-      mjIncludeXML(child, dir, vfs, included);
+      mjIncludeXML(reader, child, dir, vfs, included);
     }
     return;
   }
@@ -131,26 +151,60 @@ static void mjIncludeXML(XMLElement* elem, string dir, const mjVFS* vfs,
   }
 
   // get filename
-  string filename;
-  mjXUtil::ReadAttrTxt(elem, "file", filename, true);
-  filename = dir + filename;
+  auto file_attr = mjXUtil::ReadAttrStr(elem, "file", true);
+  if (!file_attr.has_value()) {
+    throw mjXError(elem, "Include element missing file attribute");
+  }
+  std::string filename = file_attr.value();
+
 
   // block repeated include files
   if (included.find(filename) != included.end()) {
     throw mjXError(elem, "File '%s' already included", filename.c_str());
   }
 
-  // get data source
-  mjResource *resource = mju_openVfsResource(filename.c_str(), vfs);
+  // TODO: b/325905702 - We have a messy wrapper here to remain backwards
+  // compatible, which will be removed in the near future.
+  std::string fullname;
+  if (!mjuu_isabspath(filename)) {
+    fullname = reader.ModelFileDir() + filename;
+  } else {
+    fullname = filename;
+  }
+  mjResource *resource = mju_openVfsResource(fullname.c_str(), vfs);
   if (!resource) {
     // load from provider or OS filesystem
     std::array<char, 1024> error;
-    resource = mju_openResource(filename.c_str(), error.data(), error.size());
+    resource = mju_openResource(fullname.c_str(), error.data(), error.size());
     if (!resource) {
-      throw mjXError(elem, "%s", error.data());
+      if (!mjuu_isabspath(filename)) {
+        fullname = std::string(dir) + filename;
+      } else {
+        fullname = filename;
+      }
+
+      // load from provider or OS filesystem
+      std::array<char, 1024> error;
+      resource = mju_openResource(fullname.c_str(), error.data(), error.size());
+      if (!resource) {
+        throw mjXError(elem, "%s", error.data());
+      }
     }
   }
 
+  if (!mjuu_isabspath(filename)) {
+    filename = std::string(dir) + filename;
+  }
+
+  const char* include_dir = nullptr;
+  int ninclude_dir = 0;
+  mju_getResourceDir(resource, &include_dir, &ninclude_dir);
+  std::string next_dir = std::string(include_dir, ninclude_dir);
+  if (!mjuu_isabspath(filename)) {
+    next_dir = std::string(dir) + next_dir;
+  }
+  elem->SetAttribute("dir", next_dir.data());
+
   const char* xmlstring = nullptr;
   int buffer_size = mju_readResource(resource, (const void**) &xmlstring);
   if (buffer_size < 0) {
@@ -210,14 +264,15 @@ static void mjIncludeXML(XMLElement* elem, string dir, const mjVFS* vfs,
   // recursively run include
   child = include->FirstChildElement();
   for (; child; child = child->NextSiblingElement()) {
-    mjIncludeXML(child, dir, vfs, included);
+    mjIncludeXML(reader, child, next_dir, vfs, included);
   }
 }
 
 
 
 // Main parser function
-mjCModel* mjParseXML(const char* filename, const mjVFS* vfs, char* error, int error_sz) {
+mjCModel* mjParseXML(const char* filename, const mjVFS* vfs,
+                     char* error, int error_sz) {
   LocaleOverride locale_override;
 
   // check arguments
@@ -251,7 +306,8 @@ mjCModel* mjParseXML(const char* filename, const mjVFS* vfs, char* error, int er
   int buffer_size = mju_readResource(resource, (const void**) &xmlstring);
   if (buffer_size < 0) {
     if (error) {
-      std::snprintf(error, error_sz, "mjParseXML: error reading file '%s'", filename);
+      std::snprintf(error, error_sz,
+                    "mjParseXML: error reading file '%s'", filename);
     }
     mju_closeResource(resource);
     return nullptr;
@@ -304,11 +360,12 @@ mjCModel* mjParseXML(const char* filename, const mjVFS* vfs, char* error, int er
   try {
     if (!strcasecmp(root->Value(), "mujoco")) {
       // find include elements, replace them with subtree from xml file
-      std::unordered_set<string> included = {filename};
-      mjIncludeXML(root, model->modelfiledir, vfs, included);
+      std::unordered_set<std::string> included = {filename};
+      mjXReader parser;
+      parser.SetModelFileDir(model->modelfiledir);
+      mjIncludeXML(parser, root, model->modelfiledir, vfs, included);
 
       // parse MuJoCo model
-      mjXReader parser;
       parser.SetModel(model);
       parser.Parse(root);
     }
diff --git a/src/xml/xml_native_reader.cc b/src/xml/xml_native_reader.cc
index 35b990ef..8c713cc1 100644
--- a/src/xml/xml_native_reader.cc
+++ b/src/xml/xml_native_reader.cc
@@ -1349,7 +1349,7 @@ void mjXReader::OneFlex(XMLElement* elem, mjmFlex* pflex) {
 // mesh element parser
 void mjXReader::OneMesh(XMLElement* elem, mjmMesh* pmesh) {
   int n;
-  string text, name, classname, content_type, file;
+  string text, name, classname, content_type;
 
   // read attributes
   if (ReadAttrTxt(elem, "name", name)) {
@@ -1361,8 +1361,9 @@ void mjXReader::OneMesh(XMLElement* elem, mjmMesh* pmesh) {
   if (ReadAttrTxt(elem, "content_type", content_type)) {
     mjm_setString(pmesh->content_type, content_type.c_str());
   }
-  if (ReadAttrTxt(elem, "file", file)) {
-    mjm_setString(pmesh->file, file.c_str());
+  auto file = ReadAttrFile(elem, "file", MeshDir());
+  if (file) {
+    mjm_setString(pmesh->file, file->c_str());
   }
   ReadAttr(elem, "refpos", 3, pmesh->refpos, text);
   ReadAttr(elem, "refpos", 4, pmesh->refquat, text);
@@ -1418,19 +1419,20 @@ void mjXReader::OneMesh(XMLElement* elem, mjmMesh* pmesh) {
 
 // skin element parser
 void mjXReader::OneSkin(XMLElement* elem, mjmSkin* pskin) {
-  string text, name, file, material;
+  string text, name, material;
   float data[4];
 
   // read attributes
   if (ReadAttrTxt(elem, "name", name)) {
     mjm_setString(pskin->name, name.c_str());
   }
-  if (ReadAttrTxt(elem, "file", file)) {
-    mjm_setString(pskin->file, file.c_str());
+  auto file = ReadAttrFile(elem, "file", AssetDir());
+  if (file.has_value()) {
+    mjm_setString(pskin->file, file->c_str());
   }
   if (ReadAttrTxt(elem, "material", material)) {
     mjm_setString(pskin->material, material.c_str());
-  }
+}
   ReadAttrInt(elem, "group", &pskin->group);
   if (pskin->group<0 || pskin->group>=mjNGROUP) {
     throw mjXError(elem, "skin group must be between 0 and 5");
@@ -2507,7 +2509,7 @@ void mjXReader::OneFlexcomp(XMLElement* elem, mjmBody* pbody) {
   ReadAttr(elem, "scale", 3, fcomp.scale, text);
   ReadAttr(elem, "mass", 1, &fcomp.mass, text);
   ReadAttr(elem, "inertiabox", 1, &fcomp.inertiabox, text);
-  ReadAttrTxt(elem, "file", fcomp.file);
+  fcomp.file = ReadAttrFile(elem, "file", modelfiledir_).value_or("");
   if (ReadAttrTxt(elem, "material", material)) {
     mjm_setString(dflex.material, material.c_str());
   }
@@ -3067,7 +3069,7 @@ void mjXReader::Visual(XMLElement* section) {
 // asset section parser
 void mjXReader::Asset(XMLElement* section) {
   int n;
-  string text, name, texname, content_type, file;
+  string text, name, texname, content_type;
   XMLElement* elem;
 
   // iterate over child elements
@@ -3101,8 +3103,9 @@ void mjXReader::Asset(XMLElement* section) {
       if (ReadAttrTxt(elem, "content_type", content_type)) {
         mjm_setString(ptex->content_type, content_type.c_str());
       }
-      if (ReadAttrTxt(elem, "file", file)) {
-        mjm_setString(ptex->file, file.c_str());
+      auto file = ReadAttrFile(elem, "file", TextureDir());
+      if (file.has_value()) {
+        mjm_setString(ptex->file, file->c_str());
       }
       ReadAttrInt(elem, "width", &ptex->width);
       ReadAttrInt(elem, "height", &ptex->height);
@@ -3139,12 +3142,12 @@ void mjXReader::Asset(XMLElement* section) {
 
       // separate files
       std::vector<string> cubefiles(6);
-      ReadAttrTxt(elem, "fileright", cubefiles[0]);
-      ReadAttrTxt(elem, "fileleft",  cubefiles[1]);
-      ReadAttrTxt(elem, "fileup",    cubefiles[2]);
-      ReadAttrTxt(elem, "filedown",  cubefiles[3]);
-      ReadAttrTxt(elem, "filefront", cubefiles[4]);
-      ReadAttrTxt(elem, "fileback",  cubefiles[5]);
+      cubefiles[0] = ReadAttrFile(elem, "fileright", TextureDir()).value_or("");
+      cubefiles[1] = ReadAttrFile(elem, "fileleft", TextureDir()).value_or("");
+      cubefiles[2] = ReadAttrFile(elem, "fileup", TextureDir()).value_or("");
+      cubefiles[3] = ReadAttrFile(elem, "filedown", TextureDir()).value_or("");
+      cubefiles[4] = ReadAttrFile(elem, "filefront", TextureDir()).value_or("");
+      cubefiles[5] = ReadAttrFile(elem, "fileback", TextureDir()).value_or("");
       for (int i = 0; i < cubefiles.size(); i++) {
         mjm_setInStringVec(ptex->cubefiles, i, cubefiles[i].c_str());
       }
@@ -3181,22 +3184,23 @@ void mjXReader::Asset(XMLElement* section) {
           std::string("line = " + std::to_string(elem->GetLineNum()) + ", column = -1").c_str());
 
       // read attributes
-      string name, content_type, file;
+      string name, content_type;
       if (ReadAttrTxt(elem, "name", name)) {
         mjm_setString(phf->name, name.c_str());
       }
       if (ReadAttrTxt(elem, "content_type", content_type)) {
         mjm_setString(phf->content_type, content_type.c_str());
       }
-      if (ReadAttrTxt(elem, "file", file)) {
-        mjm_setString(phf->file, file.c_str());
+      auto file = ReadAttrFile(elem, "file", AssetDir());
+      if (file.has_value()) {
+        mjm_setString(phf->file, file->c_str());
       }
       ReadAttrInt(elem, "nrow", &phf->nrow);
       ReadAttrInt(elem, "ncol", &phf->ncol);
       ReadAttr(elem, "size", 4, phf->size, text, true);
 
       // allocate buffer for dynamic hfield, copy user data if given
-      if (file.empty() && phf->nrow>0 && phf->ncol>0) {
+      if (!file.has_value() && phf->nrow>0 && phf->ncol>0) {
         int nrow = phf->nrow;
         int ncol = phf->ncol;
 
@@ -4034,3 +4038,54 @@ mjmDefault* mjXReader::GetClass(XMLElement* section) {
 void mjXReader::GetXMLPos(XMLElement* elem, mjCBase* obj) {
   obj->info = "line = " + std::to_string(elem->GetLineNum());
 }
+
+// return true if c is a directory path separator (i.e. '/' or '\' on windows)
+static bool IsSeperator(char c) {
+  return c == '/' || c == '\\';
+}
+
+void mjXReader::SetModelFileDir(std::string modelfiledir) {
+  modelfiledir_ = modelfiledir;
+  if (!modelfiledir_.empty() && !IsSeperator(modelfiledir_.back())) {
+    modelfiledir_.append("/");
+  }
+}
+
+void mjXReader::SetAssetDir(std::string assetdir) {
+  assetdir_ = assetdir;
+  if (!assetdir_.empty() && !IsSeperator(assetdir_.back())) {
+    assetdir_.append("/");
+  }
+}
+
+void mjXReader::SetMeshDir(std::string meshdir) {
+  meshdir_ = meshdir;
+  if (!meshdir_.empty() && !IsSeperator(meshdir_.back())) {
+    meshdir_.append("/");
+  }
+}
+
+void mjXReader::SetTextureDir(std::string texturedir) {
+  texturedir_ = texturedir;
+  if (!texturedir_.empty() && !IsSeperator(texturedir_.back())) {
+    texturedir_.append("/");
+  }
+}
+
+std::string mjXReader::AssetDir() const {
+  return modelfiledir_ + assetdir_;
+}
+
+std::string mjXReader::MeshDir() const {
+  if (meshdir_.empty()) {
+    return AssetDir();
+  }
+  return modelfiledir_ + meshdir_;
+}
+
+std::string mjXReader::TextureDir() const {
+  if (texturedir_.empty()) {
+    return AssetDir();
+  }
+  return modelfiledir_ + texturedir_;
+}
diff --git a/src/xml/xml_native_reader.h b/src/xml/xml_native_reader.h
index cd8d8208..3c225011 100644
--- a/src/xml/xml_native_reader.h
+++ b/src/xml/xml_native_reader.h
@@ -16,6 +16,7 @@
 #define MUJOCO_SRC_XML_XML_NATIVE_READER_H_
 
 #include <sstream>
+#include <string>
 
 #include "tinyxml2.h"
 
@@ -34,6 +35,14 @@ class mjXReader : public mjXBase {
   void Parse(tinyxml2::XMLElement* root);                              // parse XML document
   void PrintSchema(std::stringstream& str, bool html, bool pad);       // print text or HTML schema
 
+  void SetModelFileDir(std::string modelfiledir);
+  const std::string& ModelFileDir() const { return modelfiledir_; }
+
+  // setters for directory defaults
+  void SetAssetDir(std::string assetdir);
+  void SetMeshDir(std::string meshdir);
+  void SetTextureDir(std::string texturedir);
+
   // XML sections embedded in all formats
   static void Compiler(tinyxml2::XMLElement* section, mjCModel* mod);  // compiler section
   static void Option(tinyxml2::XMLElement* section, mjOption* opt);    // option section
@@ -80,6 +89,16 @@ class mjXReader : public mjXBase {
   static void GetXMLPos(tinyxml2::XMLElement* elem, mjCBase* obj);    // get xml position
 
   bool readingdefaults;  // true while reading defaults
+
+  // accessors for directory defaults
+  std::string AssetDir() const;
+  std::string MeshDir() const;
+  std::string TextureDir() const;
+
+  std::string modelfiledir_;
+  std::string assetdir_;
+  std::string meshdir_;
+  std::string texturedir_;
 };
 
 // MJCF schema
diff --git a/src/xml/xml_util.cc b/src/xml/xml_util.cc
index 91ab9858..2b230a73 100644
--- a/src/xml/xml_util.cc
+++ b/src/xml/xml_util.cc
@@ -32,8 +32,11 @@
 
 #include "tinyxml2.h"
 
+#include <mujoco/mujoco.h>
 #include "cc/array_safety.h"
+#include "engine/engine_resource.h"
 #include "engine/engine_util_errmem.h"
+#include "user/user_util.h"
 #include "xml/xml_util.h"
 #include "xml/xml_numeric_format.h"
 
@@ -156,6 +159,35 @@ XMLElement* NextSiblingElement(XMLElement* e, const char* name) {
   return nullptr;
 }
 
+static std::string ResolveFilePath(XMLElement* e, std::string filename,
+    const std::string& dir) {
+  std::string path = "";
+  if (mjuu_isabspath(filename)) {
+    return filename;
+  }
+
+  // TODO(kylebayes): We first look in the base model directory for files to
+  // remain backwards compatible.
+  std::string full_filename = dir + filename;
+  mjResource *resource = mju_openResource(full_filename.c_str(), nullptr, 0);
+  if (resource != nullptr) {
+    mju_closeResource(resource);
+    return filename;
+  }
+
+  XMLElement* parent = e->Parent()->ToElement();
+  for (; parent; parent = parent->Parent()->ToElement()) {
+    if (!std::strcmp(parent->Value(), "include")) {
+      auto file_attr = mjXUtil::ReadAttrStr(parent, "dir", false);
+      if (file_attr.has_value()) {
+        path = file_attr.value();
+      }
+      break;
+    }
+  }
+  return path + filename;
+}
+
 // constructor
 mjXSchema::mjXSchema(const char* schema[][mjXATTRNUM], unsigned nrow) {
   // set name and type
@@ -562,8 +594,8 @@ mjXUtil::ReadAttrVec(XMLElement* elem, const char* attr, bool required);
 
 
 // if attribute is present, return attribute as a string
-std::optional<std::string> mjXUtil::ReadAttrStr(XMLElement* elem, const char* attr,
-                                                bool required) {
+std::optional<std::string>
+mjXUtil::ReadAttrStr(XMLElement* elem, const char* attr, bool required) {
   const char* pstr = elem->Attribute(attr);
 
   // check if attribute exists
@@ -578,7 +610,16 @@ std::optional<std::string> mjXUtil::ReadAttrStr(XMLElement* elem, const char* at
   return std::string(pstr);
 }
 
-
+// if attribute is present, return attribute as a filename
+std::optional<std::string>
+mjXUtil::ReadAttrFile(XMLElement* elem, const char* attr,
+                      const std::string& dir, bool required) {
+  auto maybe_str = ReadAttrStr(elem, attr, required);
+  if (!maybe_str.has_value()) {
+    return std::nullopt;
+  }
+  return ResolveFilePath(elem, maybe_str.value(), dir);
+}
 
 // if attribute is present, return numerical value of attribute
 template<typename T>
diff --git a/src/xml/xml_util.h b/src/xml/xml_util.h
index c38d3890..1d819041 100644
--- a/src/xml/xml_util.h
+++ b/src/xml/xml_util.h
@@ -35,7 +35,6 @@ using tinyxml2::XMLElement;
 XMLElement* FirstChildElement(XMLElement* e, const char* name = nullptr);
 XMLElement* NextSiblingElement(XMLElement* e, const char* name = nullptr);
 
-
 // XML Error info
 class [[nodiscard]] mjXError {
  public:
@@ -109,6 +108,10 @@ class mjXUtil {
   static std::optional<std::string> ReadAttrStr(tinyxml2::XMLElement* elem, const char* attr,
                                                 bool required = false);
 
+  // if attribute is present, return attribute as a filename
+  static std::optional<std::string> ReadAttrFile(tinyxml2::XMLElement* elem, const char* attr,
+                                                 const std::string& dir = "", bool required = false);
+
   // if attribute is present, return numerical value of attribute
   template<typename T>
   static std::optional<T> ReadAttrNum(tinyxml2::XMLElement* elem, const char* attr,
diff --git a/test/CMakeLists.txt b/test/CMakeLists.txt
index 046bdadf..122760a9 100644
--- a/test/CMakeLists.txt
+++ b/test/CMakeLists.txt
@@ -58,6 +58,8 @@ target_link_libraries(
   fixture
   PUBLIC absl::core_headers
          absl::synchronization
+         absl::flat_hash_map
+         absl::flat_hash_set
          gtest
          gmock
          mujoco::mujoco
diff --git a/test/fixture.cc b/test/fixture.cc
index 4fdad189..a0c8eb25 100644
--- a/test/fixture.cc
+++ b/test/fixture.cc
@@ -14,6 +14,8 @@
 
 #include "test/fixture.h"
 
+#include <array>
+#include <cerrno>
 #include <cstdio>
 #include <cstring>
 #include <filesystem>
@@ -21,12 +23,15 @@
 #include <sstream>
 #include <string>
 #include <string_view>
+
+#include <utility>
 #include <vector>
 
 #include <gmock/gmock.h>
 #include <gtest/gtest.h>
 #include <absl/base/const_init.h>
 #include <absl/strings/str_cat.h>
+#include <absl/strings/str_join.h>
 #include <absl/synchronization/mutex.h>
 #include <mujoco/mjmodel.h>
 #include <mujoco/mujoco.h>
@@ -167,4 +172,120 @@ std::vector<mjtNum> GetCtrlNoise(const mjModel* m, int nsteps,
   return ctrl;
 }
 
+MockFilesystem::MockFilesystem(std::string unit_test_name) {
+  prefix_ = absl::StrCat("MjMock.", unit_test_name);
+  dir_ = "/";
+  if (mjp_getResourceProvider(prefix_.c_str()) != nullptr) {
+    return;
+  }
+
+  mjpResourceProvider resourceProvider;
+  mjp_defaultResourceProvider(&resourceProvider);
+  resourceProvider.prefix = prefix_.c_str();
+  resourceProvider.data = (void *) this;
+
+  resourceProvider.open = +[](mjResource* resource) {
+    MockFilesystem *fs = static_cast<MockFilesystem*>(resource->provider->data);
+    std::string filename = fs->StripPrefix(resource->name);
+    return fs->FileExists(filename) ? 1 : 0;
+  };
+
+  resourceProvider.read =+[](mjResource* resource, const void** buffer) {
+    MockFilesystem *fs = static_cast<MockFilesystem*>(resource->provider->data);
+    std::string filename = fs->StripPrefix(resource->name);
+    return (int) fs->GetFile(filename, (const unsigned char**) buffer);
+  };
+
+  resourceProvider.getdir = +[](mjResource* resource, const char** dir,
+                                int* ndir) {
+    MockFilesystem *fs = static_cast<MockFilesystem*>(resource->provider->data);
+    *dir = resource->name;
+
+    // find last directory path separator
+    int length = fs->Prefix().size() + 1;
+    for (int i = length; resource->name[i]; ++i) {
+     if (resource->name[i] == '/' || resource->name[i] == '\\') {
+        length = i + 1;
+      }
+    }
+    *ndir = length;
+  };
+
+  resourceProvider.close = +[](mjResource* resource) {};
+  mjp_registerResourceProvider(&resourceProvider);
+}
+
+bool MockFilesystem::AddFile(std::string filename, const unsigned char* data,
+                         std::size_t ndata) {
+  std::string fullfilename = PathReduce(dir_, filename);
+  auto [it, inserted] = filenames_.insert(fullfilename);
+  if (inserted) {
+    data_[fullfilename] = std::vector(data, data + ndata);
+  }
+  return inserted;
+}
+
+bool MockFilesystem::FileExists(const std::string& filename) {
+  std::string fullfilename = PathReduce(dir_, filename);
+  return filenames_.find(fullfilename) != filenames_.end();
+}
+
+std::size_t MockFilesystem::GetFile(const std::string& filename,
+                                const unsigned char** buffer) const {
+  std::string fullfilename = PathReduce(dir_, filename);
+  auto it = data_.find(fullfilename);
+  if (it == data_.end()) {
+    return 0;
+  }
+  *buffer = it->second.data();
+  return it->second.size();
+}
+
+void MockFilesystem::ChangeDirectory(std::string dir) {
+  if (dir.empty()) {
+    return;
+  }
+
+  dir_ = PathReduce(dir_, dir);
+  if (dir_.back() != '/') {
+    dir_ = absl::StrCat(dir_, "/");
+  }
+}
+
+std::string MockFilesystem::FullPath(const std::string& path) const {
+  return absl::StrCat(prefix_, ":", PathReduce(dir_, path));
+}
+
+std::string MockFilesystem::StripPrefix(const char* path) const {
+  return &path[prefix_.size() + 1];
+}
+
+std::string MockFilesystem::PathReduce(const std::string& current_dir,
+                                       const std::string& path) {
+  std::stringstream stream;
+  if (!path.empty() && path[0] != '/') {
+    stream = std::stringstream(absl::StrCat(current_dir, path));
+  } else {
+    stream = std::stringstream(path);
+  }
+
+  std::string temp;
+  std::vector<std::string> dirs;
+  while (std::getline(stream, temp, '/')) {
+    if (temp == ".." && !dirs.empty()) {
+      dirs.pop_back();
+      continue;
+    }
+
+    if (temp != "." && !temp.empty()) {
+      dirs.push_back(temp);
+    }
+  }
+  if (dirs.empty()) {
+    return "/";
+  }
+
+  return absl::StrJoin(dirs, "/");
+}
+
 }  // namespace mujoco
diff --git a/test/fixture.h b/test/fixture.h
index 6091a2a5..98fad470 100644
--- a/test/fixture.h
+++ b/test/fixture.h
@@ -22,6 +22,8 @@
 #include <vector>
 
 #include <gtest/gtest.h>
+#include <absl/container/flat_hash_map.h>
+#include <absl/container/flat_hash_set.h>
 #include <mujoco/mjmodel.h>
 #include <mujoco/mujoco.h>
 
@@ -99,6 +101,51 @@ std::string SaveAndReadXml(const mjModel* model);
 std::vector<mjtNum> GetCtrlNoise(const mjModel* m, int nsteps,
                                  mjtNum ctrlnoise = 0.01);
 
+// Installs a mock filesystem via a resource provider. To obtain thread safety,
+// each filesystem is scoped for individual unit tests with destructive
+// operations not permitted.
+class MockFilesystem {
+ public:
+  // constructs mock filesystem.  A unique name (normally the unit test name)
+  // should be passed in.
+  MockFilesystem(std::string unit_test_name);
+
+  // Move and copy operations are forbidden.
+  MockFilesystem(MockFilesystem&& other) = delete;
+  MockFilesystem& operator=(MockFilesystem&& other) = delete;
+  MockFilesystem(const MockFilesystem& other) = delete;
+  MockFilesystem& operator=(const MockFilesystem& other) = delete;
+
+  // Returns the prefix registered for the resource provider.
+  const std::string& Prefix() const { return prefix_; }
+
+  // Adds file to the current directory. Returns false if file already exists.
+  bool AddFile(std::string filename, const unsigned char* data,
+               std::size_t ndata);
+
+  // Returns true if mock filesystem has file.
+  bool FileExists(const std::string& filename);
+
+  // Change the current directory.
+  void ChangeDirectory(std::string dir);
+
+  // Helper functions for resource provider callbacks.
+  std::size_t GetFile(const std::string& filename,
+                      const unsigned char** buffer) const;
+  std::string FullPath(const std::string& path) const;
+
+
+ private:
+  std::string StripPrefix(const char* path) const;
+  static std::string PathReduce(const std::string& current_dir,
+                                const std::string& path);
+
+  absl::flat_hash_set<std::string> filenames_;
+  absl::flat_hash_map<std::string, std::vector<unsigned char>> data_;
+  std::string prefix_;
+  std::string dir_;  // current directory
+};
+
 // Installs all plugins
 class PluginTest : public MujocoTest {
  public:
diff --git a/test/fixture_test.cc b/test/fixture_test.cc
index 4fd31cf0..e893024c 100644
--- a/test/fixture_test.cc
+++ b/test/fixture_test.cc
@@ -14,6 +14,8 @@
 
 #include "test/fixture.h"
 
+#include <array>
+
 #include <gmock/gmock.h>
 #include <gtest/gtest-spi.h>
 #include <gtest/gtest.h>
@@ -49,5 +51,22 @@ TEST_F(MujocoErrorTestGuardTest, NestedErrorGuards) {
   EXPECT_THAT(mju_user_warning, IsNull());
 }
 
+TEST_F(MujocoTestTest, MockFilesystemTest) {
+  MockFilesystem fs("MockFilesystemTest");
+  std::array<unsigned char, 3> data = {'a', 'b', 'c'};
+  fs.ChangeDirectory("tmp");
+
+  fs.AddFile("../tmp2/file2", data.data(), data.size());
+  fs.AddFile("./file1", data.data(), data.size());
+
+  ASSERT_TRUE(fs.FileExists("/tmp/file1"));
+  ASSERT_TRUE(fs.FileExists("/tmp2/file2"));
+
+  fs.ChangeDirectory("../tmp2");
+
+  ASSERT_TRUE(fs.FileExists("../tmp/file1"));
+  ASSERT_TRUE(fs.FileExists("file2"));
+}
+
 }  // namespace
 }  // namespace mujoco
diff --git a/test/xml/xml_native_reader_test.cc b/test/xml/xml_native_reader_test.cc
index 5ce35ec2..ae45a4a9 100644
--- a/test/xml/xml_native_reader_test.cc
+++ b/test/xml/xml_native_reader_test.cc
@@ -464,6 +464,21 @@ TEST_F(XMLReaderTest, RepeatedDefaultName) {
 
 // ------------------------ test including -------------------------------------
 
+// credit: https://www.mjt.me.uk/posts/smallest-png/
+static constexpr unsigned char kTinyPng[] =
+    { 0x89, 0x50, 0x4E, 0x47, 0x0D, 0x0A, 0x1A, 0x0A, 0x00,
+      0x00, 0x00, 0x0D, 0x49, 0x48, 0x44, 0x52, 0x00, 0x00,
+      0x01, 0x00, 0x00, 0x00, 0x01, 0x00, 0x01, 0x03, 0x00,
+      0x00, 0x00, 0x66, 0xBC, 0x3A, 0x25, 0x00, 0x00, 0x00,
+      0x03, 0x50, 0x4C, 0x54, 0x45, 0xB5, 0xD0, 0xD0, 0x63,
+      0x04, 0x16, 0xEA, 0x00, 0x00, 0x00, 0x1F, 0x49, 0x44,
+      0x41, 0x54, 0x68, 0x81, 0xED, 0xC1, 0x01, 0x0D, 0x00,
+      0x00, 0x00, 0xC2, 0xA0, 0xF7, 0x4F, 0x6D, 0x0E, 0x37,
+      0xA0, 0x00, 0x00, 0x00, 0x00, 0x00, 0x00, 0x00, 0x00,
+      0xBE, 0x0D, 0x21, 0x00, 0x00, 0x01, 0x9A, 0x60, 0xE1,
+      0xD5, 0x00, 0x00, 0x00, 0x00, 0x49, 0x45, 0x4E, 0x44,
+      0xAE, 0x42, 0x60, 0x82 };
+
 TEST_F(XMLReaderTest, IncludeTest) {
   static constexpr char xml[] = R"(
   <mujoco>
@@ -542,7 +557,6 @@ TEST_F(XMLReaderTest, IncludeSameFileTest) {
     <geom name="box" type="box" size="1 1 1"/>
   </mujoco>)";
 
-
   auto vfs = std::make_unique<mjVFS>();
   mj_defaultVFS(vfs.get());
 
@@ -558,7 +572,229 @@ TEST_F(XMLReaderTest, IncludeSameFileTest) {
   mj_deleteVFS(vfs.get());
 }
 
+TEST_F(XMLReaderTest, IncludePathTest) {
+  static constexpr char xml[] = R"(
+  <mujoco>
+    <worldbody>
+      <geom name="plane" type="plane" size="1 1 1"/>
+      <include file="submodels/model1.xml"/>
+      <include file="submodels/model2.xml"/>
+    </worldbody>
+  </mujoco>)";
+
+  static constexpr char xml1[] = R"(
+  <mujoco>
+    <geom name="box" type="box" size="1 1 1"/>
+  </mujoco>)";
+
+  static constexpr char xml2[]= R"(
+  <mujoco>
+    <geom name="ball" type="sphere" size="2"/>
+    <include file="subsubmodels/model3.xml"/>
+  </mujoco>)";
+
+  static constexpr char xml3[]= R"(
+  <mujoco>
+    <geom name="another_box" type="box" size="2 2 2"/>
+  </mujoco>)";
+
+  MockFilesystem fs("IncludePathTest");
+  fs.AddFile("model.xml", (const unsigned char*) xml, sizeof(xml));
+  std::string modelpath = fs.FullPath("model.xml");
+
+  fs.ChangeDirectory("submodels/");
+  fs.AddFile("model1.xml", (const unsigned char*) xml1, sizeof(xml1));
+  fs.AddFile("model2.xml", (const unsigned char*) xml2, sizeof(xml2));
+  fs.AddFile("subsubmodels/model3.xml", (const unsigned char*) xml3, sizeof(xml3));
+  fs.ChangeDirectory("/");
+
+  mjModel* model = mj_loadXML(modelpath.c_str(), nullptr,
+                              nullptr, 0);
+  ASSERT_THAT(model, NotNull());
+  EXPECT_EQ(mj_name2id(model, mjOBJ_GEOM, "ball"), 2);
+  EXPECT_EQ(mj_name2id(model, mjOBJ_GEOM, "another_box"), 3);
+  mj_deleteModel(model);
+}
+
+TEST_F(XMLReaderTest, FallbackIncludePathTest) {
+  static constexpr char xml[] = R"(
+  <mujoco>
+    <worldbody>
+      <geom name="plane" type="plane" size="1 1 1"/>
+      <include file="model1.xml"/>
+      <include file="submodels/model2.xml"/>
+    </worldbody>
+  </mujoco>)";
+
+  static constexpr char xml1[] = R"(
+  <mujoco>
+    <geom name="box" type="box" size="1 1 1"/>
+  </mujoco>)";
+
+  static constexpr char xml2[]= R"(
+  <mujoco>
+    <geom name="ball" type="sphere" size="2"/>
+    <include file="subsubmodels/model3.xml"/>
+  </mujoco>)";
+
+  static constexpr char xml3[]= R"(
+  <mujoco>
+    <geom name="another_box" type="box" size="2 2 2"/>
+  </mujoco>)";
+
+  MockFilesystem fs("FallbackIncludePathTest");
+  fs.AddFile("model.xml", (const unsigned char*) xml, sizeof(xml));
+  std::string modelpath = fs.FullPath("model.xml");
+
+  fs.AddFile("model1.xml", (const unsigned char*) xml1, sizeof(xml1));
+  fs.AddFile("submodels/model2.xml", (const unsigned char*) xml2, sizeof(xml2));
+  fs.AddFile("subsubmodels/model3.xml", (const unsigned char*) xml3,
+   sizeof(xml3));
+
+  std::array<char, 1024> error;
+  mjModel* model = mj_loadXML(modelpath.c_str(), nullptr,
+                              error.data(), error.size());
+  ASSERT_THAT(model, NotNull());
+  EXPECT_EQ(mj_name2id(model, mjOBJ_GEOM, "ball"), 2);
+  EXPECT_EQ(mj_name2id(model, mjOBJ_GEOM, "another_box"), 3);
+  mj_deleteModel(model);
+}
+
+TEST_F(XMLReaderTest, IncludeAssetsTest) {
+  static constexpr char xml[] = R"(
+  <mujoco>
+   <include file="assets/assets.xml"/>
+    <worldbody>
+      <geom type="plane" material="material" size="4 4 4"/>
+    </worldbody>
+  </mujoco>
+  )";
+  static constexpr char assets[] = R"(
+  <mujoco>
+    <asset>
+      <texture file="tiny.png" type="2d"/>
+      <material name="material" texture="tiny"/>
+      <include file="subassets/assets.xml"/>
+    </asset>
+  </mujoco>
+  )";
+  static constexpr char subassets[] = R"(
+  <mujoco>
+    <texture file="subtiny.png" type="2d"/>
+    <material name="submaterial" texture="subtiny"/>
+  </mujoco>
+  )";
+
+  MockFilesystem fs("IncludeAssetsTest");
+  fs.AddFile("assets/tiny.png", kTinyPng, sizeof(kTinyPng));
+  fs.AddFile("assets/subassets/subtiny.png", kTinyPng, sizeof(kTinyPng));
+  fs.AddFile("assets/assets.xml", (const unsigned char*) assets,
+   sizeof(assets));
+  fs.AddFile("assets/subassets/assets.xml", (const unsigned char*) subassets,
+   sizeof(subassets));
+  fs.AddFile("model.xml", (const unsigned char*) xml, sizeof(xml));
+  std::string modelpath = fs.FullPath("model.xml");
+
+  // loading the file should be successful
+  mjModel* model = mj_loadXML(modelpath.c_str(), nullptr, nullptr, 0);
+
+  EXPECT_THAT(model, NotNull());
+
+  mj_deleteModel(model);
+}
+
+TEST_F(XMLReaderTest, FallbackIncludeAssetsTest) {
+  static constexpr char xml[] = R"(
+  <mujoco>
+   <include file="assets/assets.xml"/>
+    <worldbody>
+      <geom type="plane" material="material" size="4 4 4"/>
+    </worldbody>
+  </mujoco>
+  )";
+  static constexpr char assets[] = R"(
+  <mujoco>
+    <asset>
+      <texture file="tiny.png" type="2d"/>
+      <material name="material" texture="tiny"/>
+      <include file="subassets/assets.xml"/>
+    </asset>
+  </mujoco>
+  )";
+  static constexpr char subassets[] = R"(
+  <mujoco>
+    <texture file="subtiny.png" type="2d"/>
+    <material name="submaterial" texture="subtiny"/>
+  </mujoco>
+  )";
+
+  MockFilesystem fs("FallbackIncludeAssetsTest");
+  fs.AddFile("assets/tiny.png", kTinyPng, sizeof(kTinyPng));
+
+  // need to fallback for backwards compatibility
+  fs.AddFile("subtiny.png", kTinyPng, sizeof(kTinyPng));
+
+  fs.AddFile("assets/assets.xml", (const unsigned char*) assets,
+   sizeof(assets));
+  fs.AddFile("assets/subassets/assets.xml", (const unsigned char*) subassets,
+   sizeof(subassets));
+  fs.AddFile("model.xml", (const unsigned char*) xml, sizeof(xml));
+  std::string modelpath = fs.FullPath("model.xml");
+
+  // loading the file should be successful
+  std::array<char, 1024> error;
+  mjModel* model = mj_loadXML(modelpath.c_str(), nullptr,
+                              error.data(), error.size());
+  EXPECT_THAT(model, NotNull());
+
+  mj_deleteModel(model);
+}
+
+TEST_F(XMLReaderTest, IncludeAbsoluteTest) {
+  static constexpr char xml[] = R"(
+  <mujoco>
+   <include file="assets/assets.xml"/>
+    <worldbody>
+      <geom type="plane" material="material" size="4 4 4"/>
+    </worldbody>
+  </mujoco>
+  )";
+  static constexpr char assets[] = R"(
+  <mujoco>
+    <asset>
+      <texture file="tiny.png" type="2d"/>
+      <material name="material" texture="tiny"/>
+      <include file="subassets/assets.xml"/>
+    </asset>
+  </mujoco>
+  )";
+  static constexpr char subassets[] = R"(
+  <mujoco>
+    <texture file="MjMock.IncludeAbsoluteTest:assets/subtiny.png" type="2d"/>
+    <material name="submaterial" texture="subtiny"/>
+  </mujoco>
+  )";
+
+  MockFilesystem fs("IncludeAbsoluteTest");
+  fs.AddFile("assets/tiny.png", kTinyPng, sizeof(kTinyPng));
+  fs.AddFile("assets/subtiny.png", kTinyPng, sizeof(kTinyPng));
+  fs.AddFile("assets/assets.xml", (const unsigned char*) assets,
+   sizeof(assets));
+  fs.AddFile("assets/subassets/assets.xml", (const unsigned char*) subassets,
+   sizeof(subassets));
+  fs.AddFile("model.xml", (const unsigned char*) xml, sizeof(xml));
+  std::string modelpath = fs.FullPath("model.xml");
+
+  std::array<char, 1024> error;
+  // loading the file should be successful
+  mjModel* model = mj_loadXML(modelpath.c_str(), nullptr,
+                              error.data(), error.size());
+  EXPECT_THAT(model, NotNull());
+
+  mj_deleteModel(model);
+}
 // ------------------------ test frame parsing ---------------------------------
+
 TEST_F(XMLReaderTest, ParseFrame) {
   static constexpr char xml[] = R"(
   <mujoco>